Hilary Salt says by blurring the line between what is legally required and what 'feels fair', we create uncertainty about what is and isn't allowed
The lament of ‘it's not fair' was once associated mainly with whining children and grumpy teenagers - but it now crops up all the time in pensions. Is it at all helpful?
The position of many pensioners of schemes now under the HSBC umbrella has been widely publicised. These members had benefits that were integrated with the state pension scheme - so if they retired early, they received a supplement which is removed at their state pension age. This removal of the supplement is given the rather unhelpful term ‘clawback'. Pensioners are campaigning against this clawback and have received strong support including from their union, from Paul Lewis of Radio 4's Moneybox and from Frank Field - who has written to HSBC pointing out their massively increased profits and asking how much they save by applying the deduction. His clear suggestion is that they should use their profits to remove the clawback. Affected members and those campaigning with them claim that the clawback is "unfair".
Meanwhile across a number of schemes conducting actuarial valuations, the pressure from The Pensions Regulator is to increase levels of funding significantly beyond those required by legislation. The scheme-specific funding requirement set out in law says that schemes must be funded prudently at a level agreed between the trustees and sponsor. There is no requirement to aim for (non-scheme specific) buyout funding or self-sufficiency in gilts funding. And yet these are targets regularly pushed by the regulator. In part, they justify this by saying the pension scheme must be treated fairly when compared to shareholders.
In both these cases I think the use of the term ‘fair' is unhelpful and potentially dangerous. HSBC's pension scheme is paying members in full the benefits set out in the scheme rules. There is no duty on it to pay more than this, whatever the level of its profits. Of course I'd support a campaign to persuade HSBC to spend more on its workforce - by increasing pay, re-opening DB schemes to current employees or increasing all its accrued pension benefits. But it isn't right to argue it should use its money to remove clawback just because it doesn't feel fair.
Similarly in funding negotiations, the duty on scheme sponsors and trustees is set out clearly in law. To require more than this means replacing clear, objective rules with arbitrary judgements on what feels right to the regulator.
Why is all this important? Because in pensions as in everywhere else in life, it's vital to uphold the objective standard set by the rule of law. Without clear and consistently applied laws, power becomes arbitrary and we are unable to hold it to account. If we blur the line between what is legally required and what ‘feels fair', we create uncertainty about what is and what isn't allowed. My strong suspicion is that creating this uncertainty is unlikely to produce good outcomes for members of DB pension schemes. After all, if fairness is more important than the rule of law, shouldn't schemes be allowed to switch from Retail Prices Index to Consumer Prices Index increases? And if fairness trumps legal entitlements, should we really allow all those legacy DB promises to stand when current employees only have inadequate defined contribution provision?
Democracy is routinely undermined today. But applying legislation that has been thoroughly debated in a parliamentary process is an important principle to hold on to. To replace it with an arbitrary decision about what feels ‘fair' at any one particular time to any one particular observer is a step backwards, not forwards. Of course, if we don't believe the settled legislative position is right, we can build a democratic campaign to try to change it. That would be more productive than reverting to a chorus of ‘it's not fair'.
Hilary Salt is founder of First Actuarial
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